Putting a Value on Provenge

Applying this 65% to the total AIPrC patient pool gets me to a total number of eligible Provenge patients. I estimate that number to be 49,823 in 2007, growing to 61,930 in 2012.

Marketing a new drug is not like turning on a light in a darkened room -- results aren't immediate, and not every eligible patient will take a drug, for a variety of reasons. Again, calculating a penetration rate, or market share, is a mix of art and science. In the real world, the best drug with the best marketing will likely top out at 80% market share.

In this case, I start Provenge at a 2% market share because approval, if it happens at all, would come late in 2007. This is a new kind of therapy for cancer and until additional clinical data is gathered and disseminated, I think some doctors might be reluctant to try it. For these reasons, I have peak market share topping out at 55%. I hate to repeat myself, but this is fairly conservative modeling.

In my model, then, I assume 996 Provenge patients in 2007, growing to 34,062 patients in 2012.

Product Pricing

Next consideration is pricing. Dendreon hasn't publicly discussed its thinking on Provenge pricing, but various analysts and commentators have pegged the price in the range of $20,000 to $45,000 a year. I'm using a $30,000 annual price (with a 4% hike per year) in my model, which is in line with other targeted cancer therapies.

That gets us to the end: My 2007 Provenge sales estimate is just under $30 million, rising to $1.24 billion in 2012.

Now, at the top I said my peak sales forecast for Provenge was $1 billion. The lower, final estimate results from the average of three revenue models, each looking at the Provenge market in a slightly different way. I don't always build multiple sales models, but in this case -- given all the unknown variables -- I thought it prudent.

Here's model No. 2:

Provenge Prostate cancer - Revenue Model 2
	2006	2007	2008	2009	2010	2011	2012
Stage III	24,213	24,939	25,688	26,458	27,252	28,070	28,912
Stage IV	35,749	36,821	37,9268	39,064	40,236	41,443	42,686
% patients failing hormone Tx	85%	85%	85%	85%	85%	85%	85%
Total AIPrC patients	50,968	52,497	54,072	55,694	57,365	59,086	60,858
% patients choosing immunoTx	65%	65%	68%	70%	72%	75%	75%
Eligible Provenge patients	33,129	34,123	36,769	38,986	41,303	44,314	45,644
Provenge penetration	0%	2%	10%	20%	40%	50%	55%
Provenge patients	0	682	3,677	7,797	16,521	22,157	25,104
Cost/year	$0	$30,000	$31,200	$32,448	$33,746	$35,096	$36,500
Provenge sales	$0	$20,473,725	$114,718,376	$253,001,257	$557,516,461	$777,619,314	$916,284,390

In this model, I start with the number of prostate cancer patients diagnosed with Stage III and Stage IV disease. These numbers aren't easy to find, but are derived from database estimates collected by the National Cancer Institute. These patients more closely represent likely Provenge patients because their disease is more advanced at the time of diagnosis.

I assume that 85% of these patients fail hormone therapy, which makes them eligible for Provenge, based on its likely initial approval. In this model, then, my "total AIPrC patient" estimate is lower than in model No. 1.

After that lower patient base, everything else in the model remains the same. At the end, I derive an estimated U.S. 2007 Provenge sales of $20.5 million, rising to $916.3 million in 2012.

Lastly, let's look at my third model:

Provenge Prostate cancer - Revenue Model 3
	2006	2007	2008	2009	2010	2011	2012
Annual prostate cancer deaths	27,000	27,540	28,091	28,653	29,226	29,810	30,406
% patients choosing immunoTx	0%	25%	50%	65%	75%	80%	90%
Eligible Provenge patients	0	6,885	14, 045	18,624	21,919	23,848	27,366
Provenge penetration	0%	25%	40%	50%	60%	75%	85%
Provenge patients	0	1721	5618	9312	13,152	17,886	23,261
Cost/year	n/a	$30,000	$31,200	$32,448	$33,746	$35,096	$36,500
Provenge sales	$0	$51,637,500	$175,286,592	$302,159,027	$443,811,179	$627,726,532	$849,012,689

This model is the most conservative because it starts with only the number of prostate cancer patients who die each year, as estimated by the American Cancer Society. This is a much sicker and narrower patient population than will likely receive Provenge, but it does provide a minimum revenue floor for modeling purposes, which is why I like it.

You'll also notice that because this model is based on prostate cancer deaths, I assume a much higher penetration rates for Provenge, maxing out at 85% to 90%. This model comes up with 2007 Provenge revenue of $51.6 million, rising to $850 million in 2012.

When you average all three revenue models together, you get the following Provenge U.S. revenue forecast, with sales topping out at $1 billion:

	2007	2008	2009	2010	2011	2012
Average of three models	$34,001,575	$151,688,306	$304,628,034	$593,434,528	$825,344,018	$1,002,845,025

In one of my previous Dendreon columns, I said that it was easy to get to peak Provenge sales of $500 million. Obviously, I've easily surpassed that guess with this more rigorous forecast.

Briefly, let me discuss valuation. In the beginning of this article, I peg Dendreon with a $27 share price based on my revenue projections (and assuming, of course, that Provenge is approved.) This valuation underscore why Dendreon, currently at $3.74 and significantly shorted, is a great story to follow.

I derive my valuation using a fairly simple, discounted revenue valuation model. Peak Provenge sales of $1 billion in 2012, risk adjusted by 85% and discounted back just under five years gets to a net present value for Provenge of $355 million. At a reasonable six-times-sales multiple, you get an enterprise value for Dendreon of $2.1 billion. With 82 million shares outstanding and its cash on hand, Dendreon would be worth about $27 per share.

Of course, all these projections are moot if Provenge can't get a positive nod at the FDA advisory panel meeting. We'll see what happens next week.